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CNP, WEC, and DTE: Analyzing Utilities’ Current Valuations

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Dec. 29 2016, Updated 2:08 p.m. ET

CenterPoint’s valuation

CenterPoint Energy (CNP) was trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 9x on December 27, 2016. Its five-year historical average also stands near 9x. The utility sector’s average EV-to-EBITDA multiple is near 10x. CenterPoint Energy stock seems to be relatively fairly valued compared to its historical average and industry average as well.

An EV-to-EBITDA ratio gives a comparative idea of a company’s valuation, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt minus its cash holdings.

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Where do its peers stand?

In comparison, WEC Energy Group (WEC) is trading near an EV-to-EBITDA valuation multiple of 11.5x while CMS Energy (CMS) has a ratio of 10.5x.

US utilities (XLU) have traded at a five-year historical average PE (price-to-earnings) multiple of 15x–16x. On December 27, 2016, they were trading at about 20x, which was a fair premium to their historical averages. CenterPoint Energy has a price-to-earnings ratio of 19x while WEC Energy is trading at a PE multiple above 20x.

Some investors might shy away from investing in CenterPoint Energy due to its volatile earnings, driven by its midstream investment. Its stock movement was also heavily volatile because of the volatile earnings. However, on a positive note, it’s currently trading at a dividend yield of nearly 4.2%, one of the highest in the sector.

We’ll discuss CNP’s yields later in the series.

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